E-Comms Surveillance: Why archiving your records is not enough

The record-keeping obligations applicable to regulated firms undoubtedly became more onerous with the arrival of MiFID II, which extended the rules to include other forms of media and markets and removed the ability of buy-side firms to rely on broker recording. The expectations of regulators towards tackling market abuse have at the same time been ramped up following the implementation of MAR, and this regulatory intent has been demonstrated through many market abuse enforcement notices and a steady stream of cases in progress.

Every Firm must address and update its policy regarding permissible employees communication channels, both to internal and external recipients, this will enable the firm to capture all the relevant communications. The proliferation of communication channels means that firms can no longer worry just about applying record keeping requirements to phone, mobile and email channels. The switch to home working during the pandemic, and the establishment of longer-term hybrid arrangements in its aftermath, have accelerated the use of video platforms to conduct business, and alternative messaging channels, which are often encrypted, to now hold conversations that are caught by the record-keeping rules. The pandemic has also provided further challenges over remote working and policies around the use of private devices and information security questions. Firms must establish clear policies that capture these emerging challenges and demonstrate that these policies are properly implemented in practice.

However, even if a firm can gather its e-comms data across all these emerging channels, it may still find that it falls short of current regulatory expectations. This is because simply holding the data (archiving) is not enough, as this is seen as a passive activity. Firms need to consider how to demonstrate effective action against financial crime, and so active surveillance of this data is required to tackle market abuse and confirm appropriate oversight of the business.

Regulated firms have been required for some time by the FCA to have effective controls to prevent and detect market abuse. The issue of market abuse has been a fixture on the FCA’s list of priorities for many years and has moved up the list. The FCA has underlined the potential risks created by the pandemic due to the changes in working patterns and market volatility and trading practices.

Trade surveillance processes are clearly a major tool in the fight to meet these regulatory expectations concerning the identification of abusive trading practices. Increasingly trade surveillance systems are developing levels of sophistication that allow tailoring of alerts, trade reconstruction and a more intelligent monitoring of trading behaviour.

An effective and holistic approach to monitoring market abuse should also include e-comms surveillance. Archiving data will achieve compliance with the record-keeping requirement, but unless a firm can illustrate it has made an effective and proportionate effort to assess such records for indications of market abuse, then a significant potential exposure to regulatory action is created. While archiving systems for record-keeping will often include search capabilities, these tend to have limited functionality and are a cumbersome and reactive way to identify issues in the trading activity of firms. It is unlikely that firms relying on such ad hoc monitoring of record-keeping systems will be considered effective in case of a challenge. The proliferation of communications channels also poses further challenges to such an approach, given that records from each channel are often maintained in separate silos.

The appearance on the market of sophisticated e-comms surveillance systems that allow firms to effectively monitor records across multiple written and voice channels and work in conjunction with trade surveillance systems provides firms with the tools to meet enhanced scrutiny of trading activities. This is an invaluable, but not necessarily expensive, development for firms trying to meet their obligations, particularly when the regulator itself has invested heavily in its trade surveillance capabilities.

E-comms surveillance systems will scan records across channels for suspicious items using a lexicon tailored to how and where the firm trades. Where this is integrated with trade surveillance, the firm can build a complete picture around trading behaviours. Such systems increasingly come equipped with levels of artificial intelligence and machine learning that will over time increase the quality of alerts by improving relevance and reducing the volume of false positives.

Of course, even proactive e-comms surveillance will never provide complete protection against determined abusive trading practices. Still, it is vital to demonstrate the application of a consistent, robust approach that was designed around each firm’s specific areas of potential risk, so as to provide a vigorous defence of adequate procedures and oversight to regulatory challenges. For firms still relying on ad hoc review processes around archived records, it is worth considering how comfortable you would feel in the case of a forensic review identifying an incriminating email trail or voice recording that the firm was previously unaware of.

GRSS would be happy to help you with an assessment of your process, a test of your existing system, and other suggestions around surveillance.

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Nicholai Cumbo
Surveillance Analyst

Nicholai previously held the position of Senior Risk Officer at ACA Mirabella, where he was responsible for on-boarding clients, managing relationships and reviewing clients’ investment processes, risk management processes, strategy complexity, and operational arrangements. He was responsible for compiling and submitting data for Regulatory Reporting. 

After graduating with a B.Sc. in Mathematics and Physics, he transitioned to finance, by completing a post graduate certificate in the Mechanics of Risk Management. He followed this up by sitting for the FRM and became a Certified Financial Risk Manager.

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Elizabeth Mallia
Surveillance Analyst

An awardee of the Marie Curie Actions scholarship, Elizabeth built up her data crunching and analytical skills in theoretical motor neuroscience where she investigated brain mechanisms in action initiation at the Institute of Neurology, University College London.

She transferred her skillset to financial services in 2017, where she formed part of a formidable risk team at the regulatory hosting platform, ACA Mirabella. There she held the position of Senior Risk Associate, where she concentrated on risk management for funds with model-based strategies, focusing primarily on insurance-linked security investments. As part of the same role, Elizabeth worked with a subsection of the team on consolidating and improving the surveillance framework for potential market abuse of the platform’s diverse clientele, promoting an evidence-based approach in the set-up of the framework. 

Having also previously had the opportunity to study and work at various neuro-research institutions, including Karolinska Institutet, Stockholm and Radboud UMC, Nijmegen, Elizabeth brings multi-faceted experience in breaking down complex problems to facilitate custom solutions.

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Ryan Farrugia
Surveillance Analyst

Ryan most recently held the position of Senior Risk Associate at ACA Mirabella, where he was responsible for reviewing clients’ investment processes, risk management processes, strategy complexity, and operational arrangements. He was responsible for monitoring clients’ trading activities daily, including risk/trading limits. Ryan was also involved with the creation of the Governance Risk Compliance Operations Unit within the company. 

After graduating with a Bachelors’ Degree in Commerce, a Post Graduate Certificate in Finance, and a Master’s Degree in Investment and Finance, Ryan spent over two years at APS Bank in Risk Management and Finance.

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Tim Jukes
Senior Surveillance Analyst

For the last five years, Tim held the position of Senior Compliance Consultant at ACA Mirabella overseeing a wide range of complex and large firms on the hosted platform. 

Tim began his career at Price Waterhouse in 1986, where he qualified as a Chartered Accountant. Following qualification, Tim transferred to Hong Kong, where he spent 5 years specialising in the audit of multinational trading and finance entities. Tim spent 18 months on secondment at the Hong Kong Securities and Futures Commission developing an inspection regime for asset managers and advisers. 

On returning to the UK, Tim spent 3 years at IMRO, a predecessor to the FCA, specialising in asset management supervision. Tim subsequently undertook several senior in-house compliance and finance roles across a range of start-up and large asset managers specialising in open-ended funds and, subsequently, private equity. Tim then moved into compliance consulting with Cordium and more recently spent 5 years working at ACA Mirabella overseeing a wide range of hosted clients.

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Paul Springer
Senior Surveillance Analyst

Paul held the position of Senior Compliance Consultant at ACA Mirabella, where he was responsible for monitoring some of the largest clients and most complex served by Mirabella. He is a compliance professional with 25+ years of regulatory experience. 

At ACA Mirabella, as well as implementing a compliance infrastructure at each client and conducting ongoing compliance reviews, Paul’s role encompassed oversight and review of clients’ electronic communications (employing Fingerprint) and their staff members’ personal compliance interactions (utilising Compliance ELF). 

Paul spent 5 years at the FCA (then the FSA) as the Manager of a Corporate Authorisation team, followed by approximately 20 years of compliance experience in the financial services industry. He has worked in-house and held the Compliance Officer and Money Laundering Reporting Officer roles for approximately 12 years, firstly at a broking firm which he joined at start-up, and then a hedge fund manager. Paul also spent over 3 years working at a leading compliance consultancy, providing compliance support to clients (including full-scope and sub-threshold AIFMs, investment managers and advisers).  He is a qualified Chartered Accountant.

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George Camilleri
Head of Risk & Operations

George worked at ACA Mirabella for the past six years as Head of Risk Operations and managed the Malta-based Risk Team responsible for all the Firm’s risk monitoring and regulatory reporting. 

He holds an MSc in Financial Mathematics from the University of Leeds, focusing on quantitative risk management, and a BSc in Mathematics and Physics from the University of Malta. He has also taken several short courses, including the Oxford Private Markets Certificate at the Saїd Business School.

In his free time, George volunteers for non-governmental organisations within the cultural sector in Malta, having an interest in the arts, classical music, and opera.

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Sarah Donnelly
Head of Sales

Sarah recently left ACA Mirabella, where she held the role of Head of Sales. In this role, she was focused on the company’s growth, from targeting new business opportunities to nurturing existing client relationships.

Sarah is working towards the CIPD Foundation Certificate in People Practice.

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Joe Vittoria
CEO

Joe was most recently the CEO and Founder of the Mirabella Group. During the eight years that Joe grew the Mirabella business, it became the recognised leader in regulatory hosting in the UK. As its CEO and an experienced Compliance Officer, he was responsible for ensuring regulatory compliance of Mirabella and its appointed representative clients. During his tenure at Mirabella, the firm fully and successfully complied with its regulatory obligations, which included the FCA (UK), MFSA (Malta), and the NFA/ CFTC (USA).

Mirabella conducted a thorough surveillance process across all its clients’ activities, which included over $19bn in assets under management, across over 50 investment mandates, managed by over 200 portfolio managers and traders. The investment strategies it hosted ranged from Private Equity and Real Estate to complex credit and derivative processes, with the majority in long/short equity.

Apart from his experience at Mirabella, Joe has acted as COO to other investment management firms, which included quant, debt and credit strategies. Before starting in the alternative investment management industry in 1998, Joe worked at Salomon Brothers which he joined in 1985, after graduating from Yale with a BA in Economics.